Equity release could help you either right now or at some point down the road; however, it’s critical to comprehend the expected downsides. It’s also essential to take time to think about the alternatives before going ahead.
There are two principal plans available – lifetime mortgages and home reversion plans. They have pros and cons, so make sure to explore which one is best for you by analysing these.
The Seven Advantages
Equity release strategies controlled by the FCA 1offers a way for you to get access to the equity tied up in your home.
You can take this tax-free cash in a single lump sum or in regular repayments and use it as needed. Admit it; it can’t get much better than this!
#1. Tax-Free and Fancy-Free
You’ll have tax-exempt money to spend any way you like, and you won’t need to pay a charge on the amount that you release.
Individuals release equity for various reasons.
It can be to pay off a home loan or obligations, make home improvements, increase retirement income, and live a more stress-free life, support family, and pay for something such as a vacation. Wouldn’t it be great to take care of any of these effortlessly?
#2. A Fulfilling Retirement in the Home You Love
You’ll be able to remain in your own home even after you’ve released equity.
You can view equity release as another option to improve your quality of life but there are alternatives. An example of this could be where you sell your house to relocate to a more affordable one and use the difference as you feel appropriate.
With equity release, there’s also no compelling reason to move.
Listen to this…
Many choose to use a portion of the cash they release to make upgrades to their house. Suppose they use a portion of the cash for this.
In this case, it could permit you to make the most of your retirement without agonizing over fixing things around the house or making adjustments as you age.
It’s safe to say that everyone dreams of retiring in the house they love. It means you won’t have to face the pressures and costs involved in moving.
#3. Debt On the Low and Smiles on the Rise
You won’t need to make any month-to-month repayments unless you want to.
There will be no need for such repayments, or any repayment until you pass away or move into residential care. It implies that your month-to-month expenses won’t go up, which will help with your everyday budgeting.
Some individuals prefer making payments towards interest to keep their debt as low as possible. If this sounds like you, you want to look at an interest-only lifetime mortgage.
#4. No Caught-Out or Unexpected Fees
You’ll never have to pay more than the value of your home. This is known as a ‘no negative equity guarantee.
Are you wondering what this means? It means that no one will place your outstanding loan amount into your family’s hands once you’re gone.
#5. A Dip Into the Low-Interest Rate Pool
Having access to low-interest rates is another benefit, and you’ll be happy to know that these have dipped down to the lowest they’ve been in five years.
#6. Permanent Cash in Your Back-Pocket
The next advantage is that the money is there for you when you require it. Wouldn’t it be great if this was the case for you?
It means that you’ll receive a regular income as per the limit set by your plan provider. You also won’t have to pay interest until you decide to access it.
#7. Avoid Inheritance Tax and Make Your Family Happy
Paying inheritance tax could be avoided, so you can spoil your family with a cash gift without having to worry about tax eating it up. Just imagine that!
When it comes to inheritance tax, the rules can be quite complicated, so to save yourself from uncertainty, seek the advice of an expert.
The Six Disadvantages
As with anything that comes with advantages, there are disadvantages too.
Since it’s a loan secured against the value of your home, the repayment of any outstanding money will be made when you pass or move into permanent care.
Equity release will also lessen the inheritance you leave behind.
#1. Debt Can Run Away From You, But You Can’t Run Away From It
Your debt will continue to increase due to compound interest, which is when interest is added to the outstanding balance and interest charged thereon. Any money owed could increase substantially over the years – because of a lifetime mortgage not needing to be repaid until you pass or go into permanent care.
There’s a solution to this. You can reduce your debt by injecting money into your loan at a gradual rate, with an interest-only lifetime mortgage.
#2. The Negative Effect on Current and Future Benefits
Equity release could influence your current and future qualification for means-tested state benefits. These benefits can include pension credit, investment funds credit, or council tax benefit.
Regardless of whether or not you’re qualified for these advantages currently, contemplate whether you may require them later on. It’s also crucial to speak to a financial adviser about any possible limitations.
#3. A Lifelong Commitment That Can be Costly
You might face early exit fees due to a lifetime mortgage being a lifelong commitment.
If you opt for paying it off early, you might have to pay a penalty fee, which is why it’s essential to see what charges may apply, even if you don’t think they’ll apply to you.
#4. Your Home Inheritance in Someone Else’s Hands
You won’t necessarily be able to leave your house as an inheritance because your home will be sold to repay the scheme provider once you pass away or move out.
Any money that remains will go to your estate to leave as an inheritance. You can also choose to ring-fence a percentage of your home’s value if securing an inheritance for your loved ones is important to you.
#5. Extra Advice Comes With Extra Fees
You have to pay arrangement fees and pay for the mandatory advice you need to obtain.
#6. No More Loans Allowed
Once you’ve signed for an equity release, you can’t take out any other loans using your home as security.
If you have any leftover equity in your property, some providers may allow you to take out another loan in the future.
What Are the Advantages to Equity Release?
The advantages are tax-exempt money, staying in your own home, having no month-to-month reimbursements, and paying more than your house value.
You’ll also have access to low-interest rates, money when you need it, and avoidance of paying inheritance tax.
What Are the Disadvantages to Equity Release?
The disadvantages are increasing debt, benefits affected, and early exit fees.
The house also won’t be left as an inheritance, you will need to pay set-up fees, and you won’t be able to take out another loan.
How Does Equity Release Work?
There are two principal plans – lifetime house loans and house reversion plans. They have various elements, so it’s essential to explore which one is best for you.
Is Equity Release Safe?
Yes, as there are specialist advisers, solicitors, and other professionals and experts involved during the process.
What to Do Next?
Are you unsure if equity release is safe? Do you want to find out how much equity you could release? There’s a lot of advice available right here for you, and we’ll be more than happy to offer you personalized advice on a one-on-one basis.
There’s a lot to think about and process; therefore, it’s beneficial to seek expert advice. This advice can come from a specialist adviser, solicitor, or both.